Computation and Reporting of Reserves for Life Insurance Companies, 64386-64394 [2020-20144]

Download as PDF 64386 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations (b) Applicability date. This section applies to taxable years beginning on or after October 13, 2020. DEPARTMENT OF THE TREASURY Par. 3. Section 1.152–2, is amended by: ■ 1. Revising paragraph (b); and ■ 2. Adding paragraph (e). The revision and addition read as follows: 26 CFR Parts 1 and 301 ■ [TD 9911] RIN 1545–BO13 Computation and Reporting of Reserves for Life Insurance Companies § 1.152–2 Rules relating to general definition of dependent. * khammond on DSKJM1Z7X2PROD with RULES [FR Doc. 2020–20746 Filed 10–9–20; 8:45 am] BILLING CODE 4830–01–P VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: * * * * (b)(1) A payment to a spouse (payee spouse) of alimony or separate maintenance is not treated as a payment by the payor spouse for the support of any dependent. Similarly, the distribution of income of an estate or trust to a divorced or legally separated payee spouse is not treated as a payment by the payor spouse for the support of any dependent. The preceding sentence will not apply, however, to the extent that such a distribution is in satisfaction of the amount or portion of income that, by the terms of a divorce decree, a written separation agreement, or the trust instrument is fixed as payable for the support of the minor children of the payor spouse. (2) Paragraph (b)(1) of this section applies to taxable years beginning on or after October 13, 2020. * * * * * (e)(1) In defining a qualifying relative for taxable year 2018, the exemption amount in section 152(d)(1)(B) is $4,150. For taxable years 2019 through 2025, the exemption amount, as adjusted for inflation, is set forth in annual guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2) of this chapter. (2) Paragraph (e)(1) of this section applies to taxable years ending after August 28, 2018. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: September 8, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). Internal Revenue Service This document contains final regulations that provide guidance on the computation of life insurance reserves and the change in basis of computing certain reserves of insurance companies. These final regulations implement recent legislative changes to the Internal Revenue Code. This document affects entities taxable as insurance companies. DATES: Effective date: These regulations are effective October 13, 2020. Applicability dates: For dates of applicability, see §§ 1.338–11(d)(7)(iii), 1.807–1(c), 1.807–3(b), 1.807–4(e), 1.816–1(b), 1.817A–1(c), and 1.6012– 2(l). SUMMARY: Ian Follansbee at (202) 317–4453 (not a tollfree number). SUPPLEMENTARY INFORMATION: FOR FURTHER INFORMATION CONTACT: Background This document contains amendments to 26 CFR part 1 under sections 807 and 816 of the Internal Revenue Code (Code). Sections 807 and 816 were added to the Code by section 211(a) of the Deficit Reduction Act of 1984, Public Law 98–369, 98 Stat. 494. Section 807 was amended by sections 13513 and 13517 of Public Law 115–97, 131 Stat. 2054, 2143, 2144 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). These amendments by the TCJA apply to taxable years beginning after December 31, 2017. This document also amends or removes the following regulations in 26 CFR: §§ 1.338–11, 1.381(c)(22)–1, 1.801– 2, 1.801–5, 1.801–7, 1.801–8, 1.806–4, 1.807–1, 1.809–2, 1.809–5, 1.810–3, 1.817A–0, 1.817A–1, 1.818–2, 1.818–4, 1.848–1, 1.6012–2, and 301.9100–6T. These changes are conforming changes to regulations that (i) relate to repealed or amended law, (ii) reference regulations that are being removed, (iii) have no future application, or (iv) relate to other regulations made final by this document. PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 The Department of the Treasury (Treasury Department) and the IRS published proposed regulations (REG– 132529–17) in the Federal Register (85 FR 18496) on April 2, 2020 (proposed regulations). A correction to the proposed regulations was published in the Federal Register (85 FR 21129) on April 16, 2020. The Treasury Department and the IRS received six public comments on the proposed regulations. Copies of the comments received are available for public inspection at https:// www.regulations.gov or upon request. No public hearing was requested, and none was held. After consideration of all of the comments received on the proposed regulations, the proposed regulations are adopted as amended by this Treasury decision (final regulations). Summary of Comments and Explanation of Revisions This section discusses the public comments received on the proposed regulations, explains the revisions adopted in the final regulations in response to those comments, and describes guidance the Treasury Department and the IRS are providing contemporaneously with publication of the final regulations in the Federal Register. 1. Comments and Changes Relating to § 1.807–1 of the Proposed Regulations Section 807(d) of the Code provides the method of computing life insurance reserves for purposes of determining the income of an insurance company subject to Federal income tax under subchapter L of chapter 1 of the Code (subchapter L). Section 807(d)(1)(A) provides generally that the amount of life insurance reserves for a life insurance contract (other than a variable contract subject to section 807(d)(1)(B)) is the greater of (i) the net surrender value of such contract, or (ii) 92.81 percent of the reserve determined under the tax-reserve method applicable to the contract under section 807(d)(3). Section 1.807–1(a) of the proposed regulations (proposed § 1.807–1(a)) provides that no asset adequacy reserve may be included in the amount of life insurance reserves under section 807(d). Proposed § 1.807–1(a) describes an asset adequacy reserve as ‘‘includ[ing] any reserve that is established as an additional reserve based upon an analysis of the adequacy of reserves that would otherwise be established or any reserve that is not held with respect to a particular contract.’’ Further, proposed § 1.807–1(a) provides that an asset adequacy reserve is ‘‘any reserve or E:\FR\FM\13OCR1.SGM 13OCR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations portion of a reserve that would have been established pursuant to an asset adequacy analysis required by the National Association of Insurance Commissioner’s Valuation Manual 30 as it existed on December 22, 2017, the date of enactment of Public Law 115–97 . . . .’’ Two commenters requested that the first quoted provision be changed to provide that asset adequacy reserves are those reserves established pursuant to an analysis of the adequacy of reserves only if that analysis is pursuant to the requirements of the National Association of Insurance Commissioners’ (NAIC) Valuation Manual 30. Both commenters suggested the final regulations state what an asset adequacy reserve ‘‘is’’ as opposed to what it ‘‘includes.’’ Moreover, both commenters would remove the language that includes within the definition of ‘‘asset adequacy reserve’’ any reserve that is not held with respect to a particular contract. The final regulations generally incorporate these comments. The final regulations, however, also incorporate in the definition of asset adequacy reserves any reserve that is similar to an asset adequacy reserve that is determined under the NAIC’s requirements as of the date the reserve is determined. With respect to the second provision previously quoted, one commenter proposed removing the December 22, 2017, fixed date and replacing it with a reference to ‘‘the date the reserve is determined.’’ The commenter believed that such a change would make the provision more consistent with section 807(d)(3), which generally requires using the tax reserve method that is applicable as of the date the reserve is determined. The final regulations do not adopt this suggestion. Section 807(d)(3) specifically provides that the tax reserve method (for example, the Commissioners’ Reserve Valuation Method (CRVM) or Commissioners’ Annuity Reserve Valuation Method (CARVM)) to be used in determining a reserve is the tax reserve method that is applicable when the reserve is determined. No such rule exists with respect to asset adequacy reserves. The reserves determined based on the application of those parts of the NAIC Valuation Manual, as it existed when the TCJA was enacted, that implement and define CRVM and CARVM are not asset adequacy reserves. See Staff of the Joint Committee on Taxation, 115th Cong., General Explanation of Public Law 115–97, 235 (Comm. Print 2018) (Bluebook) (‘‘Under NAIC-prescribed VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 principle-based reserve methodology in effect at the time of the enactment of the provision, principle-base[d] reserves for any contract do not include any asset adequacy reserve component.’’) (citation omitted). On the other hand, any additional reserve required to be set aside under Valuation Manual 30, as it existed when the TCJA was enacted, based on an analysis of the adequacy of the reserves otherwise determined, constitutes an asset adequacy reserve under § 1.807–1 of the final regulations. One commenter proposed the addition of a general provision explaining the significance and selection of the tax reserve method for a contract. The final regulations include such a provision. The commenter also proposed the addition of an example illustrating the determination of life insurance reserves under section 807(d)(1) and the exclusion of asset adequacy reserves from life insurance reserves. The Treasury Department and the IRS did not include the example in the final regulations, but the principles illustrated by the example are explained in this preamble. 2. Comments and Changes Relating to § 1.807–4 of the Proposed Regulations Section 807(f)(1) of the Code provides that if the basis for determining any item referred to in section 807(c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between (A) the amount of the item at the close of the taxable year, computed on the new basis, and (B) the amount of the item at the close of the taxable year, computed on the old basis, as is attributable to contracts issued before the taxable year must be taken into account under section 481 as adjustments attributable to a change in method of accounting initiated by the taxpayer and made with the consent of the Secretary. Section 1.807–4 of the proposed regulations (proposed § 1.807–4) provides guidance relating to both the change in basis of computing reserves of a life insurance company and the change in basis of computing life insurance reserves of an insurance company other than a life insurance company (a nonlife insurance company). Under proposed § 1.807–4(a), a change in basis of computing an item referred to in section 807(c) is a change in method of accounting for purposes of § 1.446–1(e), unless § 1.446–1(e) provides otherwise. Accordingly, under proposed § 1.807–4(a), both a life insurance company changing the basis PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 64387 of computing an item referred to in section 807(c) and a nonlife insurance company changing the basis of computing life insurance reserves must follow the administrative procedures prescribed by the Commissioner of Internal Revenue or his delegate (Commissioner) to obtain the consent of the Commissioner to such a change. A. Relationship Between Section 446 and Subchapter L One commenter suggested that § 1.807–4(a) state at the outset that section 807(f) treats a change in basis of computing reserves as a change in method of accounting. The commenter thought this would better establish why § 1.446–1(e) applies to the change in basis of computing reserves. The final regulations incorporate this suggestion. The amendment of section 807(f) by the TCJA led to the requirement in § 1.807– 4(a) that changes in basis of computing an item referred to in section 807(c) must follow the same administrative procedures as other changes in method of accounting. Accordingly, this Treasury decision removes or obsoletes contrary guidance (for example, § 1.806– 4 and Rev. Rul. 94–74, 1994–2 C.B. 157). Another commenter took the position that a change in basis of computing an item referred to in section 807(c) is not a change in method of accounting that should require consent under section 446(e). The commenter believed that the IRS’s consent should be needed under section 481(c) only to reflect a multiyear spread of a section 481(a) adjustment that may result from a change in basis of computing reserves. The Treasury Department and the IRS do not agree with this position. The computation of reserves has always been a method of accounting. See Am. Gen. Life & Accident Ins. Co. v. United States, 90–1 USTC (CCH) ¶ 50,010 (M.D. Tenn. 1989) (‘‘[W]hile the government is correct in classifying the change at issue as a change in method of accounting, it is also more specifically a change in the method of computing reserves.’’); Rev. Rul. 94–74 (stating that ‘‘§ 807(f) is a more specific application of the general tax rules governing a change in method of accounting’’). Under the specific provisions of former section 807(f), the general change in method of accounting procedures did not apply to a change in basis of computing reserves. With the TCJA’s amendment to section 807(f), the procedures generally applicable to a change in method of accounting apply to a change in basis of computing reserves under section 807(c). See Bluebook at 228 (stating that a company that changes its method of computing E:\FR\FM\13OCR1.SGM 13OCR1 64388 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES reserves must comply with applicable IRS procedures). The same commenter recommended that if the final regulations do not remove the requirement that a change in basis of computing reserves under section 807(f) requires consent under section 446(e), then the preamble to the final regulations should clarify that section 446(b) does not apply to the determination of insurance reserves. This recommendation is similar to another commenter’s recommendation that the preamble should acknowledge that the application of the consent provisions of section 446(e) and § 1.446–1(e) does not affect the role of sections 811(a) and 807(d) with respect to the determination of section 807(c) reserves. Except in extraordinary circumstances, section 446(b) does not affect the requirement that a life insurance company compute its reserves for Federal income tax purposes as required by subchapter L. Similarly, subchapter L does not affect the requirement under section 446(e) that an insurance company secure the consent of the Commissioner before changing its basis of computing reserves. B. Examples in § 1.807–4(d) Proposed § 1.807–4 contains four examples illustrating the principles of proposed § 1.807–4(a) through (c). One commenter suggested several clarifications to Example 1 and Example 2 in proposed § 1.807–4(d). Additionally, the commenter requested additional guidance on how the standard for what constitutes a change in basis of computing reserves applies to frequently-encountered fact patterns involving life insurance reserves, such as under principle-based reserve methodologies. The final regulations do not include what had been Example 1 and Example 2 in proposed § 1.807–4(d). The principles illustrated in these examples are sufficiently illustrated in the remaining examples. Moreover, the Treasury Department and the IRS are providing additional guidance on the fact patterns that constitute a change in basis of computing life insurance reserves in Rev. Rul. 2020–19, 2020–40 I.R.B. 611, released contemporaneously with publication of these final regulations in the Federal Register. C. Automatic Consent Procedures for Reserves of Nonlife Insurance Companies Currently, section 26.04 of Rev. Proc. 2019–43, 2019–48 I.R.B. 1107, provides for automatic consent to a change in VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 method of accounting if that change relates to section 807(c) items (which include life insurance reserves for a nonlife insurance company). One commenter requested that the same treatment be extended to changes in method of accounting for the unearned premium reserves and the unpaid loss reserves of nonlife insurance companies. The final regulations do not incorporate this request, and the Treasury Department and the IRS do not anticipate that Rev. Proc. 2019–43 will be amended to allow for the requested automatic consent. The automatic consent procedures provided in section 26.04 of Rev. Proc. 2019–43 to life insurance companies for a change in basis of computing reserves and to nonlife insurance companies for a change in basis of computing life insurance reserves were a response to the specific change in section 807(f) made by the TCJA. No such change was made by the TCJA for unearned premium reserves or unpaid loss reserves of nonlife insurance companies. D. Obsoleting of Revenue Rulings and Notice The preamble to the proposed regulations proposes obsoleting the following revenue rulings because they are inconsistent with section 807(f), as amended by the TCJA: Rev. Rul. 2002– 6, 2002–1 C.B. 460, Rev. Rul. 94–74, 1994–2 C.B. 157, Rev. Rul. 80–117, 1980–1 C.B. 143, Rev. Rul. 80–116, 1980–1 C.B. 141, Rev. Rul. 78–354, 1978–2 C.B. 190, Rev. Rul. 77–198, 1977–1 C.B. 190, Rev. Rul. 75–308, 1975–2 C.B. 264, Rev. Rul. 74–57, 1974– 1 C.B. 163, Rev. Rul. 70–568, 1970–2 C.B. 140, Rev. Rul. 70–192, 1970–1 C.B. 153, Rev. Rul. 69–444, 1969–2 C.B. 145, Rev. Rul. 65–240, 1965–2 C.B. 236, Rev. Rul. 65–233, 1965–2 C.B. 228, Rev. Rul. 65–143, 1965–1 C.B. 261. One commenter believes Rev. Rul. 2002–6, Rev. Rul. 94–74, and Rev. Rul. 69–444 contain principles that provide guidance on what constitutes a change in basis of computing reserves and that additional guidance is needed if these revenue rulings are obsoleted. While this Treasury decision obsoletes those revenue rulings, the Treasury Department and the IRS are providing additional guidance on the fact patterns that constitute a change in basis of computing life insurance reserves contemporaneously with publication of the final regulations in the Federal Register. See Rev. Rul. 2020–19. The preamble to the proposed regulations also proposes to obsolete Notice 2010–29, 2010–15 I.R.B. 547, PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 which provided interim guidance relating to variable annuity contracts as a result of the adoption by the NAIC of Actuarial Guideline 43, which describes a principle-based reserve method. No comments were received regarding this proposed obsolescence, and this Treasury decision obsoletes Notice 2010–29. E. Revising Section 26.04 of Rev. Proc. 2019–43 The preamble to the proposed regulations describes revisions that the Treasury Department and the IRS intend to make to section 26.04 of Rev. Proc. 2019–43. First, section 26.04(2)(b)(ii) of Rev. Proc. 2019–43 provides that multiple changes during the same taxable year for the same type of contract are considered a single change in basis and the effects of such changes are netted and treated as a single section 481(a) adjustment. Section 807(f)(1), however, provides that the section 481(a) adjustment is the difference between the amount of any item referred to in section 807(c) computed on the new basis and the amount of such item computed on the old basis. Accordingly, the Treasury Department and the IRS intend to revise section 26.04 of Rev. Proc. 2019–43 to require netting of the section 481(a) adjustments at the level of each item referred to in section 807(c) so there is a single section 481(a) adjustment for each of the items referred to in section 807(c). Second, section 26.04(1) of Rev. Proc. 2019–43 provides that the automatic change procedures apply to a nonlife insurance company. The Treasury Department and the IRS intend to revise section 26.04 of Rev. Proc. 2019–43 to clarify the manner in which nonlife insurance companies implement changes to the basis of computing life insurance reserves (as defined in section 816(b)) during a taxable year (year of change). Specifically, the clarification would provide that, if a nonlife insurance company changes the basis of computing its life insurance reserves, then for purposes of applying section 832(b)(4), (i) for the year of change, life insurance reserves at the end of the year of change with respect to contracts issued before the year of change are determined on the old basis and (ii) for the year following the year of change, life insurance reserves at the end of the preceding taxable year with respect to contracts issued before the year of change are determined on the new basis. Life insurance reserves attributable to contracts issued during the year of change and thereafter must be computed on the new basis. E:\FR\FM\13OCR1.SGM 13OCR1 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations One commenter agreed with the intended revisions. khammond on DSKJM1Z7X2PROD with RULES 3. Comments and Changes Relating to § 1.807–3 of the Proposed Regulations Section 13517 of the TCJA added section 807(e)(6) to the Code, which provides that the Secretary of the Treasury or his delegate (Secretary) ‘‘shall require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the opening and closing balance of reserves and with respect to the method of computing reserves for purposes of determining income.’’ In accordance with section 807(e)(6), § 1.807–3 of the proposed regulations (proposed § 1.807– 3) provides that the IRS may require reporting on Form 1120–L with respect to the opening and closing balances of the items described in section 807(c) and with respect to the method of computing such items for the purposes of determining income. One commenter requested further consultation with the life insurance industry before any additional reserve reporting requirements are implemented. According to the commenter, this consultation will be necessary to ensure that the information provided is useful to the government and that providing the information is not unduly burdensome to taxpayers relative to the information’s utility. The IRS understands the importance of obtaining the life insurance industry’s input before changing the reporting requirements. Proposed § 1.807–3 is adopted as final by this Treasury decision, and the IRS expects to consult with the life insurance industry before making any changes to reporting requirements. Further, as discussed in the Special Analysis section of this preamble, any future changes to tax return form requirements stemming from this provision would be subject to burden analysis and public notice and comment under the Paperwork Reduction Act, which requirements the IRS is committed to follow. 4. Comments and Changes Relating to § 1.816–1 of the Proposed Regulations Section 1.816–1(a) of the proposed regulations (proposed § 1.816–1(a)) provides that a reserve (other than an asset adequacy reserve) that is computed using a tax reserve method as defined in section 807(d)(3) and that meets the requirements of section 816(b)(1) and (b)(2) will not be disqualified as a life insurance reserve solely because the method used to calculate the reserve takes into account factors other than those prescribed by section 816(b)(1) and (b)(2). Thus, for VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 instance, reserves calculated using principle-based reserve methodologies will not fail to qualify as life insurance reserves solely because the reserves might be calculated using certain factors in addition to assumed rates of interest and recognized mortality or morbidity tables. One commenter requested the preamble for the final regulations state that in some cases the use of additional factors in computing reserves for taxable years prior to the effective date of these final regulations is not prohibited. The commenter did not want any negative inference that proposed § 1.816–1 is making permissible what was before impermissible (namely using certain additional factors in computing reserves). The Treasury Department and the IRS agree that certain factors other than those prescribed by section 816(b)(1) and (b)(2) may be taken into account in determining life insurance reserves for taxable years prior to the effective date of these final regulations if the use of such factors would make the calculation of the reserve more accurate. See, e.g., Mutual Benefit Life Insurance Co. v. Commissioner, 488 F.2d 1101, 1106 (3d Cir. 1974). 5. Comments and Changes Relating to § 1.6012–2 of the Proposed Regulations The Conference Report to the TCJA contemplates requiring the electronic filing of annual statements to improve reporting of insurance reserves, as necessary to carry out and enforce section 807. H.R. Rep. No. 115–466, at 478–79 (2017) (Conference Report). In response to the Conference Report, the proposed regulations propose to remove § 1.6012–2(c)(4), which prohibits an insurance company that files its Form 1120–L or Form 1120–PC electronically from attaching its annual statement (or pro forma annual statement) to its return. One commenter stated that for some of the largest groups of companies, the size limits found in section 2.1.2 of IRS Publication 4164, Modernized e-File (MeF) Guide to Software Developers and Transmitters, Processing Year 2020, would likely be exceeded if the annual statement were to be filed electronically, and for other groups of companies, the size limit would likely be exceeded by the return and the annual statement when combined. The commenter suggested retaining the existing rule that electronic filers should not submit their annual statements with their returns, or alternatively, changing the requirement such that electronic filers must only submit limited parts of the annual statement. PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 64389 The final regulations retain § 1.6012– 2(c)(4), but it now provides that electronic filers must file their annual statement or a portion thereof in accordance with the applicable rules in the forms or instructions. The Treasury Department and the IRS anticipate that once the IRS has the capacity to accept the electronic filing of annual statements, the tax return forms and instructions will require electronic filing of all or portions of the annual statement. The IRS, however, expects to consult with the insurance industry before requiring such electronic filing. 6. Comments and Changes Relating to § 1.817A–1 of the Proposed Regulations The proposed regulations propose to remove parts of § 1.817A–1 that pertain to sections 807(d)(2)(B) and 812(b)(2)(A). Those sections were removed by the TCJA. The notice of proposed rulemaking requested comments on whether § 1.817A–1 should continue to provide a current market interest rate to be used in computing reserves under section 807(c)(3) during the temporary guarantee period of a modified guaranteed contract (MGC) given that the TCJA modified the flush language of section 807(c) to provide a specific interest rate to be used in making section 807(c)(3) computations. One commenter recommended that § 1.817A–1 be removed in its entirety. The final regulations remove provisions relating to section 807(c)(3) but retain the provision (and related definitions) that waives section 811(d) for nonequity indexed MGCs during the temporary guarantee period, because these rules continue to remain relevant. 7. Conforming Changes to Regulations The proposed regulations also propose to remove or amend the following regulatory provisions: §§ 1.338–11, 1.381(c)(22)–1, 1.801–2, 1.801–5, 1.801–7, 1.801–8, 1.806–4, 1.809–2, 1.809–5, 1.810–3, 1.817A–0, 1.818–2, 1.818–4, 1.848–1, and 301.9100–6T. These provisions were proposed to be removed or amended because they related to repealed or amended law or to regulations that were proposed to be removed or amended or they had no future application. One commenter suggested that parts of paragraph (a) of § 1.801–7, a provision proposed to be removed in its entirety, continue to remain relevant under section 817. By its terms, § 1.801– 7 is not applicable to any taxable year beginning after 1962. See § 1.801–7(d). Because § 1.801–7 is not applicable to any taxable year after 1962, the commenter’s suggestion is not adopted. E:\FR\FM\13OCR1.SGM 13OCR1 64390 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES More generally, the commenter requested removal of more ‘‘deadwood’’ provisions than provided for in the notice of proposed rulemaking. The removal of additional ‘‘deadwood’’ provisions is beyond the scope of this rulemaking. No other specific comments were received with respect to these proposed conforming changes. 8. Comments Regarding Foreign-Issued Life Insurance and Annuity Contracts The Code contains a statutory definition of a life insurance contract under section 7702, rules applicable to certain flexible premium contracts under section 101(f), distribution on death requirements under section 72(s), and diversification requirements under section 817(h). These statutory requirements, which reflect Congress’s concern that the tax-favored treatment generally accorded life insurance and annuity contracts was available to contracts that were too investment oriented or provided for undue tax deferral, are relevant to the tax treatment of a policyholder, annuitant, or beneficiary as well as the entity that issues or reinsures a life insurance or annuity contract. In response to a request to promulgate regulations that exempt certain contracts from the statutory requirements of sections 72(s), 101(f), 817(h), and 7702, the preamble to the proposed regulations asks for comments on whether such regulations should be promulgated. As described in the preamble to the proposed regulations, the requested exemption would apply to contracts issued by a non-U.S. insurance company and reinsured by a U.S. insurance company if (i) no policyholder, insured, annuitant, or beneficiary with respect to the contract is a U.S. person and (ii) such contract is regulated as a life insurance or annuity contract by a foreign regulator. The preamble to the proposed regulations states that the Treasury Department and the IRS are evaluating the request, including whether to address it as part of this rulemaking, and requests comments including in respect of statutory interpretation and implications in various contexts and provisions outside of subchapter L. Three comments were received. One commenter (whose comment was endorsed by another commenter) generally repeated the original request (but narrowed the requested exemptions to only sections 7702 and 72(s)) and stated that such regulations would assist U.S. reinsurers of exempted contracts to qualify as life insurance companies under section 816. The commenter asserted that the proposal would (i) VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 align with domestic and U.S. international tax policy considerations because they would be applicable only to contracts owned by and benefitting persons not subject to Federal income tax and (ii) support policy goals of the TCJA to bring profitable business operations into the United States. The commenter further asserted that such regulations would not (i) affect the character, source, or separate category basket in which income derived from the reinsurance is included for U.S. withholding tax or foreign tax credit purposes, (ii) alter the application of any applicable U.S. withholding tax on income from sources within the United States paid by a domestic insurance company to any foreign corporation, or (iii) affect the treatment under section 59A of any claims and benefits or any other amounts paid by a domestic insurance company to a foreign related party under a reinsurance contract. The commenter acknowledged that it may not be possible for a U.S. insurance company to know the identity of a contract’s underlying beneficial owners unless the beneficial owner and the policyholder were the same person and requested that U.S. insurance companies be able to rely upon the Foreign Account Tax Compliance Act beneficial ownership rules to determine if a contract has a U.S. person as a beneficial owner. Another commenter stated that tax reserve deductions are already available for failed life insurance contracts under other provisions of section 807(c), just in a different amount than would be the case with life insurance reserve treatment. The commenter stated that there could nevertheless be benefits of conformity and suggested an alternative proposal. The commenter recommended that the Treasury Department and the IRS use their authority under sections 811(a) and 7805(a) to issue regulations that provide that reserves held by a U.S. reinsurer relating to indemnity reinsurance of contracts issued by a foreign insurance company be treated as life insurance reserves for purposes of subchapter L if: (i) The underlying contracts are issued by a foreign insurer, (ii) such contracts are regulated as life insurance or annuity contracts both under the applicable law in the foreign jurisdiction and by the regulator of the reinsuring domestic insurance company, (iii) the NAIC prescribes reserves for such contracts that are computed as reserves applicable to life insurance or annuity contracts, and (iv) the initial issuance of the insurance contract to the policyholder was not PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 through the conduct of a trade or business within the United States. The considerations surrounding the issuance of the requested regulations are complex and require further study. Accordingly, the Treasury Department and the IRS have decided not to issue the requested regulations as part of this rulemaking and will continue to carefully consider these comments. Applicability Dates The rules in the final regulations apply to taxable years beginning after October 13, 2020. A taxpayer may rely on § 1.807–4 or 1.816–1 of the proposed regulations for a taxable year beginning after December 31, 2017, and on or before October 13, 2020. Alternatively, a taxpayer may choose to apply § 1.807–4, 1.816–1, or 1.817A–1(b) of the final regulations to a taxable year beginning after December 31, 2017, the effective date of the revision of section 807 made by the TCJA, and on or before October 13, 2020, provided the taxpayer consistently applies the relevant regulation to that taxable year and all subsequent taxable years. See section 7805(b)(7). Effect on Other Documents The following revenue rulings are obsoleted for taxable years beginning after October 13, 2020: Rev. Rul. 2002– 6, 2002–1 C.B. 460, Rev. Rul. 94–74, 1994–2 C.B. 157, Rev. Rul. 80–117, 1980–1 C.B. 143, Rev. Rul. 80–116, 1980–1 C.B. 141, Rev. Rul. 78–354, 1978–2 C.B. 190, Rev. Rul. 77–198, 1977–1 C.B. 190, Rev. Rul. 75–308, 1975–2 C.B. 264, Rev. Rul. 74–57, 1974– 1 C.B. 163, Rev. Rul. 70–568, 1970–2 C.B. 140, Rev. Rul. 70–192, 1970–1 C.B. 153, Rev. Rul. 69–444, 1969–2 C.B. 145, Rev. Rul. 65–240, 1965–2 C.B. 236, Rev. Rul. 65–233, 1965–2 C.B. 228, and Rev. Rul. 65–143, 1965–1 C.B. 261. Notice 2010–29 is obsoleted for taxable years beginning after December 31, 2017. Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. Paperwork Reduction Act The collection of information relating to the final regulations was submitted to the Office of Management and Budget for review under OMB Control Number 1545–0123 in accordance with the E:\FR\FM\13OCR1.SGM 13OCR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). In response to the Conference Report and comments on the proposed regulations, § 1.6012–2(c)(4), as revised by the final regulations, provides that an insurance company should include the insurance company’s annual statement (as defined in § 1.6012–2(c)(5)), or a portion thereof, with an electronically filed Federal income tax return (Form 1120–L for a life insurance company and Form 1120–PC for a nonlife insurance company) as required by the applicable forms or instructions. Federal income tax items of an insurance company are determined in part based upon the insurance company’s annual statement. Providing the annual statement, or a portion thereof, to the IRS with an electronically filed Federal income tax return will allow the IRS to better and more efficiently examine an insurance company’s Federal income tax return. However, until the applicable forms or instructions are revised, the current rules for including the annual statement with an electronically filed Federal income tax return continue to apply. For purposes of the Paperwork Reduction Act, the burden for the collection of information associated with § 1.6012–2 of the final regulations will be reflected in the burden on the Form 1120–L and in the burden on the Form 1120–PC (OMB Control Number 1545–0123) when the burden for each is revised to reflect the collection of information associated with § 1.6012–2 of the final regulations. The respondents to the collection of information are life insurance companies that file the Form 1120–L electronically and nonlife insurance companies that file the Form 1120–PC electronically. The Treasury Department and the IRS expect to consult with the life insurance industry before making any changes to these reporting requirements. In accordance with section 807(e)(6), as added by the TCJA, § 1.807–3 of the final regulations provides that the IRS may require reporting on Form 1120–L of the opening balance and closing balance of items described in section 807(c) (for example, life insurance reserves) and the method of computing such items for purposes of determining income. Providing this information will allow the IRS to better examine an insurance company’s Federal income tax return. However, under § 1.807–3 of the final regulations, this information is not required to be provided on any prescribed forms, such as the Form 1120–L, until the relevant prescribed forms or instructions are revised to VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 require the reporting of such information. For purposes of the Paperwork Reduction Act, the burden for the collection of information associated with § 1.807–3 of the final regulations will be reflected in the burden on the Form 1120–L (OMB Control Number 1545–0123) when the burden is revised to reflect the collection of information associated with § 1.807–3 of the final regulations. The respondents to the collection of information are life insurance companies that file a Form 1120–L. The Treasury Department and the IRS expect to consult with the life insurance industry before making any changes to these reporting requirements. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Regulatory Flexibility Act It is hereby certified that the final regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). Section 13517 of the TCJA added section 807(e)(6) to the Code. Under section 807(e)(6), the Secretary may require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the opening balances and the closing balances of reserves and with respect to the method of computing reserves for purposes of determining income. Section 1.807–3 of the final regulations allows the IRS to require the reporting of this information on any prescribed forms, such as the Form 1120–L. The Conference Report provides that, under existing authority, the Secretary may require an insurance company to provide its annual statement via a link, electronic copy, or other similar means. See Conference Report at 478–79. Section 1.6012–2(c)(4) of the final regulations provides that an insurance company should include the insurance company’s annual statement, or a portion thereof, with an electronically filed Federal income tax return (Form 1120–L for a life insurance company and Form 1120–PC for a nonlife insurance company) as required by the applicable forms or instructions. Under current procedures, an insurance company can only electronically file a Form 1120–L or Form 1120–PC if the insurance company is part of an affiliated group filing a consolidated return, the parent of which files a Form 1120. Although data are not readily PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 64391 available, the Treasury Department and the IRS expect that any reporting burden associated with § 1.6012–2(c) will fall primarily on financial and insurance firms with annual receipts greater than $41.5 million and, therefore, will not affect a substantial number of small entities. See 13 CFR 121.201, sector 52 (finance and insurance). As stated in the preceding paragraph, the rule is not expected to affect a substantial number of small entities; however, even if a substantial number of small entities were affected, the economic impact of the regulation is not likely to be significant. Section 1.807–3 of the final regulations is limited in scope to time and manner of information reporting, and any economic impact associated with this regulation is expected to be minimal. Further, the information reported to the IRS is information that the insurance company has readily available and the Treasury Department and the IRS expect to consult with the life insurance industry before making any changes to the reporting requirements. Accordingly, the Secretary certifies that the final regulations will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding the Final Regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. Drafting Information The principal author of these regulations is Ian Follansbee, Office of Associate Chief Counsel (Financial Institutions and Products), IRS. However, other personnel from the Treasury Department and the IRS participated in their development. Statement of Availability of IRS Documents The IRS notices, revenue procedures, and revenue rulings cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. E:\FR\FM\13OCR1.SGM 13OCR1 64392 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1 and 301 are amended as follows: (7) * * * (iii) Application of paragraphs (d)(2) and (3) of this section. Paragraphs (d)(2) and (3) of this section apply to taxable years beginning after October 13, 2020. For taxable years beginning on or before such date, see paragraph (d) of this section as contained in 26 CFR part 1 revised as of April 1, 2020. * * * * * PART 1—INCOME TAXES § 1.381(c)(22)–1 26 CFR Part 301 Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements. Paragraph 1. The authority citation for part 1 is amended by adding a sectional authority for § 1.807–3 in numerical order to read in part as follows: * * § 1.801–8 § 1.807–3 [Amended] Par. 4. Section 1.801–2 is amended in the second sentence by removing the language ‘‘1.801–7’’ and adding ‘‘1.801– 6’’ in its place. ■ * Section 1.807–3 also issued under 26 U.S.C. 807(e)(6). § 1.801–5 * * * * * Par. 2. Section 1.338–11 is amended by: ■ 1. Revising paragraph (d)(2). ■ 2. In paragraph (d)(3)(i), removing the language ‘‘and (d)(3)(iii)’’ and adding ‘‘through (iv)’’ in its place. ■ 3. Redesignating paragraph (d)(3)(iii) as paragraph (d)(3)(iv). ■ 4. Adding a new paragraph (d)(3)(iii). ■ 5. Revising newly redesignated paragraph (d)(3)(iv). ■ 6. Adding paragraph (d)(7)(iii). The revisions and additions read as follows: ■ § 1.338–11 Effect of section 338 election on insurance company targets. § 1.807–1 Computation of life insurance reserves. * (a) Tax reserve method. For purposes of determining the amount of life insurance reserves for a contract under section 807(d)(1), section 807(d)(2) requires the determination of the amount of the reserve for a contract using the tax reserve method applicable to the contract. Under section 807(d)(3), the tax reserve method applicable to the contract is the Commissioners’ Reserve Valuation Method (CRVM), the Commissioners’ Annuities Reserve Valuation Method (CARVM), or other reserve method prescribed by the National Association of Insurance Commissioners (NAIC) that applies to the contract as of the date the reserve is determined. If the NAIC has not prescribed a reserve method that covers the contract, a reserve method that is consistent with the CRVM, the CARVM, or other NAIC-prescribed method as of the date the reserve is determined (whichever is most appropriate) must be used. (b) No asset adequacy reserve. The life insurance reserve determined under section 807(d)(1) does not include any asset adequacy reserve. ■ khammond on DSKJM1Z7X2PROD with RULES Par. 6. Section 1.801–7 is removed and reserved. § 1.801–2 Authority: 26 U.S.C. 7805 * * * * [Amended] Par. 3. In § 1.381(c)(22)–1, paragraph (b)(6) is removed and reserved. ■ ■ * (1) An asset adequacy reserve is— (i) Any reserve that is established as an additional reserve based upon an analysis of the adequacy of reserves that would otherwise be established in accordance with the requirements set forth in the NAIC Valuation Manual, such as the CRVM or CARVM as applicable, or (ii) Any similar reserve. (2) In determining whether a reserve is a life insurance reserve, the label placed on such reserve is not determinative, provided, however, any reserve or portion of a reserve that would have been established pursuant to an asset adequacy analysis required by the NAIC’s Valuation Manual 30 as it existed on December 22, 2017, the date of enactment of Public Law 115–97, is an asset adequacy reserve. (c) Applicability date. The rules of this section apply to taxable years beginning after October 13, 2020. ■ Par. 10. Sections 1.807–3 and 1.807– 4 are added before the undesignated center heading ‘‘Gain and Loss From Operations’’ to read as follows: * * * * (d) * * * (2) Exception. New target is not treated as receiving additional premium under paragraph (d)(1) of this section if it is under state receivership as of the close of the taxable year for which the increase in reserves occurs. (3) * * * (iii) Increases in section 807(c) reserves. The positive amount with respect to the items referred to in section 807(c) other than discounted unpaid loss reserves is the sum of the net increases in such items that are required to be taken into account under section 807(f). (iv) Increases in other reserves. The positive amount with respect to reserves other than discounted unpaid loss reserves and other items referred to in section 807(c) is the net increase of those reserves due to changes in estimate, methodology, or other assumptions used to compute the reserves (including the adoption by new target of a methodology or assumptions different from those used by old target). * * * * * VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 [Amended] Par. 5. In § 1.801–5, paragraph (c) is removed and reserved. § 1.801–7 [Removed and reserved] ■ [Amended] Par. 7. In § 1.801–8, paragraph (e) is removed and reserved. ■ § 1.806–4 [Removed] Par. 8. Section 1.806–4 is removed. ■ Par. 9. Section 1.807–1 is revised to read as follows: ■ PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 Reporting of reserves. (a) Reserve reporting. A life insurance company subject to tax under section 801 is required to make a return on Form 1120–L, U.S. Life Insurance Company Income Tax Return. The Internal Revenue Service may require reporting with respect to the opening balance and closing balance of items described in section 807(c) and with respect to the method of computing such items for purposes of determining income. Such reporting may provide for the manner in which separate account items are reported. (See section 6011 and § 301.6011–1 of this chapter.) (b) Applicability date. The rules of this section apply to taxable years beginning after October 13, 2020. § 1.807–4 Adjustment for change in computing reserves. (a) Requirement to follow administrative procedures. Under section 807(f), a change in basis of computing an item referred to in section 807(c) is a change in method of accounting. Accordingly, except as provided in § 1.446–1(e), a change in basis of computing an item referred to in section 807(c) is a change in method of accounting for purposes of § 1.446– 1(e). Before computing such item under a new basis, a life insurance company must obtain the consent of the Commissioner of Internal Revenue or his delegate (Commissioner) pursuant to administrative procedures prescribed by the Commissioner. Similarly, an insurance company other than a life E:\FR\FM\13OCR1.SGM 13OCR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations insurance company (a nonlife insurance company) that changes its basis of computing life insurance reserves must obtain the consent of the Commissioner pursuant to administrative procedures prescribed by the Commissioner. (b) Section 481 adjustment—(1) In general. If the basis of computing any item referred to in section 807(c) as of the close of any taxable year (the year of change) differs from the basis of computing such item at the close of the preceding taxable year, then the difference between the amount of the item at the close of the taxable year computed on the new basis and the amount of the item at the close of the taxable year computed on the old basis that is attributable to contracts issued before the taxable year, is taken into account under section 481 and §§ 1.481–1 through 1.481–5 as an adjustment attributable to a change in method of accounting. (2) Loss of company status. If for any taxable year a taxpayer that was an insurance company for the year of change is no longer an insurance company, then the taxpayer must take into account in the preceding taxable year (that is, the last taxable year it was an insurance company) the balance of any section 481(a) adjustment determined under paragraph (b)(1) of this section. A taxpayer that was an insurance company for the year of change does not accelerate the balance of any section 481(a) adjustment determined under paragraph (b)(1) of this section merely because it changes from a life insurance company to a nonlife insurance company or because it changes from a nonlife insurance company to a life insurance company. (c) Effect on determining increase or decrease in reserves—(1) Effect under section 807(a) and (b). If there is a change in basis of computing any item referred to in section 807(c) for a taxable year, then, for purposes of section 807(a) and (b), the closing balance for such item for the year of change with respect to contracts issued before the year of change is determined on the old basis and the opening balance for such item for the next taxable year for such contracts is computed on the new basis. (2) Effect under section 832. The following rules apply for purposes of section 832(b)(4): (i) For the year of change, life insurance reserves at the end of the year of change with respect to contracts issued before the year of change are determined on the old basis. (ii) For the taxable year following the year of change, life insurance reserves at the end of the preceding taxable year (that is, the year of change) with respect VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 to contracts issued before the year of change are determined on the new basis. (d) Examples. The principles of paragraphs (a) through (c) of this section are illustrated by the following examples. For purposes of these examples and except as otherwise provided, IC is a life insurance company within the meaning of section 816(a) that issues life insurance and annuity contracts. IC is required to determine the amount of life insurance reserves under section 807(d) and to take net increases or decreases in the reserves into account in computing life insurance company taxable income. IC’s reserve for each insurance contract at issue exceeds the net surrender value for such contract and does not exceed the statutory reserve for such contract. IC is on an accrual method and uses a calendar year as its taxable year. (1) Example 1—(i) Facts. In 2021, IC changed the basis of computing the amount of life insurance reserves for a certain type of life insurance contract as described in section 807(f). Both the basis used for computing the reserves for the relevant contracts at the close of the 2020 taxable year (old basis) and the basis of computing the reserves for the relevant type of contract at the close of the 2021 taxable year (new basis) are consistent with the applicable Commissioners’ Reserve Valuation Method. IC followed the administrative procedures prescribed by the Commissioner to obtain consent to change the basis of computing these reserves. IC determined that the life insurance reserves as of December 31, 2021, for the relevant contracts issued prior to 2021 were $110x if computed using the old method and $120x if computed using the new method. IC also determined that the life insurance reserves as of December 31, 2021, for the relevant contracts issued during 2021 were $15x using the new basis. (ii) Analysis. IC must take into account under section 481 and the administrative procedures prescribed by the Commissioner the $10x difference between the reserves for the relevant contracts issued prior to 2021 computed under the old basis ($110x) and the reserves for such contracts computed under the new basis ($120x). For purposes of determining any net increase or net decrease in reserves in taxable year 2021 under section 807(a) or (b), IC’s closing balance of life insurance reserves computed under section 807(d) with respect to the relevant contracts is $110x for contracts issued prior to 2021 (computed on the old basis) and $15x for contracts issued during 2021 (computed on the new basis). IC’s opening balance in 2022 for PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 64393 life insurance reserves for the relevant contracts is $135x (computed on the new basis). (2) Example 2—(i) Facts. The facts are the same as in paragraph (d)(1) of this section (the facts in Example 1), except that IC is an insurance company that is not a life insurance company. IC is required to compute taxable income under section 832. (ii) Analysis. IC must take into account under section 481 and the administrative procedures prescribed by the Commissioner the $10x difference between the reserves for the relevant contracts issued prior to 2021 computed under the old basis ($110x) and the reserves for such contracts computed under the new basis ($120x). For purposes of determining the premiums earned on insurance contracts during the taxable year as described in section 832(b)(4) for the year of change, the life insurance reserves at the end of the taxable year are $110x for contracts issued prior to 2021 (computed on the old basis) and $15x for contracts issued during 2021 (computed on the new basis). For purposes of determining the premiums earned on insurance contracts during the taxable year as described in section 832(b)(4) for the taxable year following the year of change, the life insurance reserves at the end of the preceding taxable year (the year of change) with respect to relevant contracts are $135x (computed on the new basis). (e) Applicability date. The rules of this section apply to taxable years beginning after October 13, 2020. However, a taxpayer may choose to apply the rules of this section for a taxable year beginning after December 31, 2017, the effective date of the revision of section 807 by Public Law 115–97, and on or before October 13, 2020, provided the taxpayer consistently applies the rules of this section to that taxable year and all subsequent taxable years. See section 7805(b)(7). § 1.809–2 [Removed and reserved] Par. 11. Section 1.809–2 is removed and reserved. ■ § 1.809–5 [Amended] Par. 12. Section 1.809–5 is amended by removing the language ‘‘and § 1.810– 3’’ from the last sentence of paragraph (a)(5)(iii). ■ § 1.810–3 [Removed] Par. 13. Section 1.810–3 is removed. ■ Par. 14. Section 1.816–1 is added before the undesignated center heading ‘‘Miscellaneous Provisions’’ to read as follows: ■ E:\FR\FM\13OCR1.SGM 13OCR1 64394 § 1.816–1 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Rules and Regulations Life insurance reserves. (a) Definition of life insurance reserves. Except as provided in section 816(h), a reserve that meets the requirements of section 816(b)(1) and (2) will not be disqualified as a life insurance reserve solely because the method used to compute the reserve takes into account other factors, provided that the method used to compute the reserve is a tax reserve method as defined in section 807(d)(3) and that such reserve is not an asset adequacy reserve as described in § 1.807–1(b). (b) Applicability date. The section applies to taxable years beginning after October 13, 2020. However, a taxpayer may choose to apply the rules of this section for a taxable year beginning after December 31, 2017, the effective date of the revision of section 807 by Public Law 115–97, and on or before October 13, 2020, provided the taxpayer consistently applies the rules of this section to that taxable year and all subsequent taxable years. See section 7805(b)(7). § 1.817A–0 [Removed] Par. 15. Section 1.817A–0 is removed. ■ Par. 16. Section 1.817A–1 is amended by: ■ 1. Removing paragraphs (a)(5) and (6). ■ 2. Revising paragraph (b). ■ 3. Removing paragraph (c). ■ 4. Redesignating paragraph (d) as paragraph (c). ■ 5. Revising newly designated paragraph (c). The revisions read as follows: ■ § 1.817A–1 contracts. Certain modified guaranteed khammond on DSKJM1Z7X2PROD with RULES * * * * * (b) Waiver of section 811(d) for certain non-equity-indexed modified guaranteed contracts. Section 811(d) is waived during the temporary guarantee period when applied to non-equityindexed MGCs. (c) Applicability dates. Paragraph (b) of this section applies to taxable years beginning after October 13, 2020. However, a taxpayer may choose to apply the rules of paragraph (b) of this section for a taxable year beginning after December 31, 2017, the effective date of the revision of section 807 by Public Law 115–97, and on or before October 13, 2020, provided the taxpayer consistently applies the rules of paragraph (b) of this section to that taxable year and all subsequent taxable years. See section 7805(b)(7). For taxable years beginning on or before October 13, 2020, see paragraph (b) of VerDate Sep<11>2014 15:52 Oct 09, 2020 Jkt 253001 this section as contained in 26 CFR part 1 revised as of April 1, 2020. § 1.818–2 [Amended] Par. 17. Section 1.818–2 is amended by removing paragraph (c). ■ § 1.818–4 [Removed and reserved] Par. 18. Section 1.818–4 is removed and reserved. ■ § 1.848–1 [Amended] Par. 19. Section 1.848–1 is amended in paragraph (b)(2)(i) by removing the language ‘‘section 807(e)(4)’’ and adding the language ‘‘section 807(e)(3)’’ in its place. ■ Par. 20. Section 1.6012–2 is amended by: ■ 1. Revising paragraph (c)(4). ■ 2. Revising paragraph (l). The revisions read as follows: ■ § 1.6012–2 Corporations required to make returns of income. * * * * * (c) * * * (4) Special rule for insurance companies filing their Federal income tax returns electronically. If an insurance company described in paragraph (c)(1), (2), or (3) of this section files its Federal income tax return electronically, it must include on or with such return its annual statement (or pro forma annual statement), or a portion thereof, as and to the extent required by forms or instructions. If the full annual statement is not required to be included with the return, such statement must be available at all times for inspection by authorized Internal Revenue Service officers or employees and retained for so long as such statements may be material in the administration of any internal revenue law. See § 1.6001–1(e). * * * * * (l) Applicability date. Paragraph (c) of this section applies to any taxable year beginning after October 13, 2020. For taxable years beginning on or before October 13, 2020, see paragraph (c) of this section as contained in 26 CFR part 1 in effect on April 1, 2020. PART 301—PROCEDURE AND ADMINISTRATION Par. 21. The authority citation for part 301 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Par. 22. Section 301.9100–6T is amended by: ■ 1. Adding a title to the table in paragraph (a)(1). ■ 2. Removing from the table in paragraph (a)(1) the three entries for ■ PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 ‘‘211’’ and the entries for ‘‘216(c)(1),’’ ‘‘216(c)(2),’’ ‘‘217(i),’’ and ‘‘217(l)(2)(B).’’ ■ 3. Removing and reserving paragraph (a)(2)(iii). ■ 4. Removing paragraph (a)(3)(v). ■ 5. In paragraph (a)(4): ■ i. Removing ‘‘211 (Code section 810(b)(3)), 216(c) (1) and (2), 217(l),’’ from the first sentence. ■ ii. Removing ‘‘211 (Code sections 806(d)(4), and 807(d)(4)(C)), 217(i),’’ from the second sentence. ■ iii. Removing the last sentence. The addition reads as follows: § 301.9100–6T Time and manner of making certain elections under the Deficit Reduction Act of 1984. (a) * * * (1) * * * Table 1 to Paragraph (A)(1) * * * * * Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: September 1, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2020–20144 Filed 10–9–20; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket Number USCG–2020–0511] RIN 1625–AA00 Safety Zone; Spa Creek, Annapolis, MD Coast Guard, DHS. Temporary final rule. AGENCY: ACTION: The Coast Guard is establishing a temporary safety zone for certain waters of Spa Creek. This action is necessary to provide for the safety of life on these navigable waters within Market Slip (Ego Alley), Annapolis, MD, during a film project on October 22, 2020 (alternate date October 23, 2020). This regulation prohibits persons and vessels from being in the safety zone unless authorized by the Captain of the Port Maryland-National Capital Region or a designated representative. DATES: This rule is effective from 5 a.m. on October 22, 2020 through noon on October 23, 2020. ADDRESSES: To view documents mentioned in this preamble as being available in the docket, go to https:// SUMMARY: E:\FR\FM\13OCR1.SGM 13OCR1

Agencies

[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Rules and Regulations]
[Pages 64386-64394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20144]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9911]
RIN 1545-BO13


Computation and Reporting of Reserves for Life Insurance 
Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the computation of life insurance reserves and the change in basis 
of computing certain reserves of insurance companies. These final 
regulations implement recent legislative changes to the Internal 
Revenue Code. This document affects entities taxable as insurance 
companies.

DATES: 
    Effective date: These regulations are effective October 13, 2020.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.338-11(d)(7)(iii), 1.807-1(c), 1.807-3(b), 1.807-4(e), 1.816-1(b), 
1.817A-1(c), and 1.6012-2(l).

FOR FURTHER INFORMATION CONTACT: Ian Follansbee at (202) 317-4453 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under sections 
807 and 816 of the Internal Revenue Code (Code). Sections 807 and 816 
were added to the Code by section 211(a) of the Deficit Reduction Act 
of 1984, Public Law 98-369, 98 Stat. 494. Section 807 was amended by 
sections 13513 and 13517 of Public Law 115-97, 131 Stat. 2054, 2143, 
2144 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). 
These amendments by the TCJA apply to taxable years beginning after 
December 31, 2017.
    This document also amends or removes the following regulations in 
26 CFR: Sec. Sec.  1.338-11, 1.381(c)(22)-1, 1.801-2, 1.801-5, 1.801-7, 
1.801-8, 1.806-4, 1.807-1, 1.809-2, 1.809-5, 1.810-3, 1.817A-0, 1.817A-
1, 1.818-2, 1.818-4, 1.848-1, 1.6012-2, and 301.9100-6T. These changes 
are conforming changes to regulations that (i) relate to repealed or 
amended law, (ii) reference regulations that are being removed, (iii) 
have no future application, or (iv) relate to other regulations made 
final by this document.
    The Department of the Treasury (Treasury Department) and the IRS 
published proposed regulations (REG-132529-17) in the Federal Register 
(85 FR 18496) on April 2, 2020 (proposed regulations). A correction to 
the proposed regulations was published in the Federal Register (85 FR 
21129) on April 16, 2020. The Treasury Department and the IRS received 
six public comments on the proposed regulations. Copies of the comments 
received are available for public inspection at https://www.regulations.gov or upon request. No public hearing was requested, 
and none was held.
    After consideration of all of the comments received on the proposed 
regulations, the proposed regulations are adopted as amended by this 
Treasury decision (final regulations).

Summary of Comments and Explanation of Revisions

    This section discusses the public comments received on the proposed 
regulations, explains the revisions adopted in the final regulations in 
response to those comments, and describes guidance the Treasury 
Department and the IRS are providing contemporaneously with publication 
of the final regulations in the Federal Register.

1. Comments and Changes Relating to Sec.  1.807-1 of the Proposed 
Regulations

    Section 807(d) of the Code provides the method of computing life 
insurance reserves for purposes of determining the income of an 
insurance company subject to Federal income tax under subchapter L of 
chapter 1 of the Code (subchapter L). Section 807(d)(1)(A) provides 
generally that the amount of life insurance reserves for a life 
insurance contract (other than a variable contract subject to section 
807(d)(1)(B)) is the greater of (i) the net surrender value of such 
contract, or (ii) 92.81 percent of the reserve determined under the 
tax-reserve method applicable to the contract under section 807(d)(3).
    Section 1.807-1(a) of the proposed regulations (proposed Sec.  
1.807-1(a)) provides that no asset adequacy reserve may be included in 
the amount of life insurance reserves under section 807(d). Proposed 
Sec.  1.807-1(a) describes an asset adequacy reserve as ``includ[ing] 
any reserve that is established as an additional reserve based upon an 
analysis of the adequacy of reserves that would otherwise be 
established or any reserve that is not held with respect to a 
particular contract.'' Further, proposed Sec.  1.807-1(a) provides that 
an asset adequacy reserve is ``any reserve or

[[Page 64387]]

portion of a reserve that would have been established pursuant to an 
asset adequacy analysis required by the National Association of 
Insurance Commissioner's Valuation Manual 30 as it existed on December 
22, 2017, the date of enactment of Public Law 115-97 . . . .''
    Two commenters requested that the first quoted provision be changed 
to provide that asset adequacy reserves are those reserves established 
pursuant to an analysis of the adequacy of reserves only if that 
analysis is pursuant to the requirements of the National Association of 
Insurance Commissioners' (NAIC) Valuation Manual 30. Both commenters 
suggested the final regulations state what an asset adequacy reserve 
``is'' as opposed to what it ``includes.'' Moreover, both commenters 
would remove the language that includes within the definition of 
``asset adequacy reserve'' any reserve that is not held with respect to 
a particular contract.
    The final regulations generally incorporate these comments. The 
final regulations, however, also incorporate in the definition of asset 
adequacy reserves any reserve that is similar to an asset adequacy 
reserve that is determined under the NAIC's requirements as of the date 
the reserve is determined.
    With respect to the second provision previously quoted, one 
commenter proposed removing the December 22, 2017, fixed date and 
replacing it with a reference to ``the date the reserve is 
determined.'' The commenter believed that such a change would make the 
provision more consistent with section 807(d)(3), which generally 
requires using the tax reserve method that is applicable as of the date 
the reserve is determined.
    The final regulations do not adopt this suggestion. Section 
807(d)(3) specifically provides that the tax reserve method (for 
example, the Commissioners' Reserve Valuation Method (CRVM) or 
Commissioners' Annuity Reserve Valuation Method (CARVM)) to be used in 
determining a reserve is the tax reserve method that is applicable when 
the reserve is determined. No such rule exists with respect to asset 
adequacy reserves.
    The reserves determined based on the application of those parts of 
the NAIC Valuation Manual, as it existed when the TCJA was enacted, 
that implement and define CRVM and CARVM are not asset adequacy 
reserves. See Staff of the Joint Committee on Taxation, 115th Cong., 
General Explanation of Public Law 115-97, 235 (Comm. Print 2018) 
(Bluebook) (``Under NAIC-prescribed principle-based reserve methodology 
in effect at the time of the enactment of the provision, principle-
base[d] reserves for any contract do not include any asset adequacy 
reserve component.'') (citation omitted). On the other hand, any 
additional reserve required to be set aside under Valuation Manual 30, 
as it existed when the TCJA was enacted, based on an analysis of the 
adequacy of the reserves otherwise determined, constitutes an asset 
adequacy reserve under Sec.  1.807-1 of the final regulations.
    One commenter proposed the addition of a general provision 
explaining the significance and selection of the tax reserve method for 
a contract. The final regulations include such a provision.
    The commenter also proposed the addition of an example illustrating 
the determination of life insurance reserves under section 807(d)(1) 
and the exclusion of asset adequacy reserves from life insurance 
reserves. The Treasury Department and the IRS did not include the 
example in the final regulations, but the principles illustrated by the 
example are explained in this preamble.

2. Comments and Changes Relating to Sec.  1.807-4 of the Proposed 
Regulations

    Section 807(f)(1) of the Code provides that if the basis for 
determining any item referred to in section 807(c) as of the close of 
any taxable year differs from the basis for such determination as of 
the close of the preceding taxable year, then so much of the difference 
between (A) the amount of the item at the close of the taxable year, 
computed on the new basis, and (B) the amount of the item at the close 
of the taxable year, computed on the old basis, as is attributable to 
contracts issued before the taxable year must be taken into account 
under section 481 as adjustments attributable to a change in method of 
accounting initiated by the taxpayer and made with the consent of the 
Secretary.
    Section 1.807-4 of the proposed regulations (proposed Sec.  1.807-
4) provides guidance relating to both the change in basis of computing 
reserves of a life insurance company and the change in basis of 
computing life insurance reserves of an insurance company other than a 
life insurance company (a nonlife insurance company). Under proposed 
Sec.  1.807-4(a), a change in basis of computing an item referred to in 
section 807(c) is a change in method of accounting for purposes of 
Sec.  1.446-1(e), unless Sec.  1.446-1(e) provides otherwise. 
Accordingly, under proposed Sec.  1.807-4(a), both a life insurance 
company changing the basis of computing an item referred to in section 
807(c) and a nonlife insurance company changing the basis of computing 
life insurance reserves must follow the administrative procedures 
prescribed by the Commissioner of Internal Revenue or his delegate 
(Commissioner) to obtain the consent of the Commissioner to such a 
change.
A. Relationship Between Section 446 and Subchapter L
    One commenter suggested that Sec.  1.807-4(a) state at the outset 
that section 807(f) treats a change in basis of computing reserves as a 
change in method of accounting. The commenter thought this would better 
establish why Sec.  1.446-1(e) applies to the change in basis of 
computing reserves. The final regulations incorporate this suggestion. 
The amendment of section 807(f) by the TCJA led to the requirement in 
Sec.  1.807-4(a) that changes in basis of computing an item referred to 
in section 807(c) must follow the same administrative procedures as 
other changes in method of accounting. Accordingly, this Treasury 
decision removes or obsoletes contrary guidance (for example, Sec.  
1.806-4 and Rev. Rul. 94-74, 1994-2 C.B. 157).
    Another commenter took the position that a change in basis of 
computing an item referred to in section 807(c) is not a change in 
method of accounting that should require consent under section 446(e). 
The commenter believed that the IRS's consent should be needed under 
section 481(c) only to reflect a multi-year spread of a section 481(a) 
adjustment that may result from a change in basis of computing 
reserves. The Treasury Department and the IRS do not agree with this 
position. The computation of reserves has always been a method of 
accounting. See Am. Gen. Life & Accident Ins. Co. v. United States, 90-
1 USTC (CCH) ] 50,010 (M.D. Tenn. 1989) (``[W]hile the government is 
correct in classifying the change at issue as a change in method of 
accounting, it is also more specifically a change in the method of 
computing reserves.''); Rev. Rul. 94-74 (stating that ``Sec.  807(f) is 
a more specific application of the general tax rules governing a change 
in method of accounting''). Under the specific provisions of former 
section 807(f), the general change in method of accounting procedures 
did not apply to a change in basis of computing reserves. With the 
TCJA's amendment to section 807(f), the procedures generally applicable 
to a change in method of accounting apply to a change in basis of 
computing reserves under section 807(c). See Bluebook at 228 (stating 
that a company that changes its method of computing

[[Page 64388]]

reserves must comply with applicable IRS procedures).
    The same commenter recommended that if the final regulations do not 
remove the requirement that a change in basis of computing reserves 
under section 807(f) requires consent under section 446(e), then the 
preamble to the final regulations should clarify that section 446(b) 
does not apply to the determination of insurance reserves. This 
recommendation is similar to another commenter's recommendation that 
the preamble should acknowledge that the application of the consent 
provisions of section 446(e) and Sec.  1.446-1(e) does not affect the 
role of sections 811(a) and 807(d) with respect to the determination of 
section 807(c) reserves.
    Except in extraordinary circumstances, section 446(b) does not 
affect the requirement that a life insurance company compute its 
reserves for Federal income tax purposes as required by subchapter L. 
Similarly, subchapter L does not affect the requirement under section 
446(e) that an insurance company secure the consent of the Commissioner 
before changing its basis of computing reserves.
B. Examples in Sec.  1.807-4(d)
    Proposed Sec.  1.807-4 contains four examples illustrating the 
principles of proposed Sec.  1.807-4(a) through (c). One commenter 
suggested several clarifications to Example 1 and Example 2 in proposed 
Sec.  1.807-4(d). Additionally, the commenter requested additional 
guidance on how the standard for what constitutes a change in basis of 
computing reserves applies to frequently-encountered fact patterns 
involving life insurance reserves, such as under principle-based 
reserve methodologies.
    The final regulations do not include what had been Example 1 and 
Example 2 in proposed Sec.  1.807-4(d). The principles illustrated in 
these examples are sufficiently illustrated in the remaining examples. 
Moreover, the Treasury Department and the IRS are providing additional 
guidance on the fact patterns that constitute a change in basis of 
computing life insurance reserves in Rev. Rul. 2020-19, 2020-40 I.R.B. 
611, released contemporaneously with publication of these final 
regulations in the Federal Register.
C. Automatic Consent Procedures for Reserves of Nonlife Insurance 
Companies
    Currently, section 26.04 of Rev. Proc. 2019-43, 2019-48 I.R.B. 
1107, provides for automatic consent to a change in method of 
accounting if that change relates to section 807(c) items (which 
include life insurance reserves for a nonlife insurance company). One 
commenter requested that the same treatment be extended to changes in 
method of accounting for the unearned premium reserves and the unpaid 
loss reserves of nonlife insurance companies.
    The final regulations do not incorporate this request, and the 
Treasury Department and the IRS do not anticipate that Rev. Proc. 2019-
43 will be amended to allow for the requested automatic consent. The 
automatic consent procedures provided in section 26.04 of Rev. Proc. 
2019-43 to life insurance companies for a change in basis of computing 
reserves and to nonlife insurance companies for a change in basis of 
computing life insurance reserves were a response to the specific 
change in section 807(f) made by the TCJA. No such change was made by 
the TCJA for unearned premium reserves or unpaid loss reserves of 
nonlife insurance companies.
D. Obsoleting of Revenue Rulings and Notice
    The preamble to the proposed regulations proposes obsoleting the 
following revenue rulings because they are inconsistent with section 
807(f), as amended by the TCJA: Rev. Rul. 2002-6, 2002-1 C.B. 460, Rev. 
Rul. 94-74, 1994-2 C.B. 157, Rev. Rul. 80-117, 1980-1 C.B. 143, Rev. 
Rul. 80-116, 1980-1 C.B. 141, Rev. Rul. 78-354, 1978-2 C.B. 190, Rev. 
Rul. 77-198, 1977-1 C.B. 190, Rev. Rul. 75-308, 1975-2 C.B. 264, Rev. 
Rul. 74-57, 1974-1 C.B. 163, Rev. Rul. 70-568, 1970-2 C.B. 140, Rev. 
Rul. 70-192, 1970-1 C.B. 153, Rev. Rul. 69-444, 1969-2 C.B. 145, Rev. 
Rul. 65-240, 1965-2 C.B. 236, Rev. Rul. 65-233, 1965-2 C.B. 228, Rev. 
Rul. 65-143, 1965-1 C.B. 261.
    One commenter believes Rev. Rul. 2002-6, Rev. Rul. 94-74, and Rev. 
Rul. 69-444 contain principles that provide guidance on what 
constitutes a change in basis of computing reserves and that additional 
guidance is needed if these revenue rulings are obsoleted. While this 
Treasury decision obsoletes those revenue rulings, the Treasury 
Department and the IRS are providing additional guidance on the fact 
patterns that constitute a change in basis of computing life insurance 
reserves contemporaneously with publication of the final regulations in 
the Federal Register. See Rev. Rul. 2020-19.
    The preamble to the proposed regulations also proposes to obsolete 
Notice 2010-29, 2010-15 I.R.B. 547, which provided interim guidance 
relating to variable annuity contracts as a result of the adoption by 
the NAIC of Actuarial Guideline 43, which describes a principle-based 
reserve method. No comments were received regarding this proposed 
obsolescence, and this Treasury decision obsoletes Notice 2010-29.
E. Revising Section 26.04 of Rev. Proc. 2019-43
    The preamble to the proposed regulations describes revisions that 
the Treasury Department and the IRS intend to make to section 26.04 of 
Rev. Proc. 2019-43. First, section 26.04(2)(b)(ii) of Rev. Proc. 2019-
43 provides that multiple changes during the same taxable year for the 
same type of contract are considered a single change in basis and the 
effects of such changes are netted and treated as a single section 
481(a) adjustment. Section 807(f)(1), however, provides that the 
section 481(a) adjustment is the difference between the amount of any 
item referred to in section 807(c) computed on the new basis and the 
amount of such item computed on the old basis. Accordingly, the 
Treasury Department and the IRS intend to revise section 26.04 of Rev. 
Proc. 2019-43 to require netting of the section 481(a) adjustments at 
the level of each item referred to in section 807(c) so there is a 
single section 481(a) adjustment for each of the items referred to in 
section 807(c).
    Second, section 26.04(1) of Rev. Proc. 2019-43 provides that the 
automatic change procedures apply to a nonlife insurance company. The 
Treasury Department and the IRS intend to revise section 26.04 of Rev. 
Proc. 2019-43 to clarify the manner in which nonlife insurance 
companies implement changes to the basis of computing life insurance 
reserves (as defined in section 816(b)) during a taxable year (year of 
change). Specifically, the clarification would provide that, if a 
nonlife insurance company changes the basis of computing its life 
insurance reserves, then for purposes of applying section 832(b)(4), 
(i) for the year of change, life insurance reserves at the end of the 
year of change with respect to contracts issued before the year of 
change are determined on the old basis and (ii) for the year following 
the year of change, life insurance reserves at the end of the preceding 
taxable year with respect to contracts issued before the year of change 
are determined on the new basis. Life insurance reserves attributable 
to contracts issued during the year of change and thereafter must be 
computed on the new basis.

[[Page 64389]]

    One commenter agreed with the intended revisions.

3. Comments and Changes Relating to Sec.  1.807-3 of the Proposed 
Regulations

    Section 13517 of the TCJA added section 807(e)(6) to the Code, 
which provides that the Secretary of the Treasury or his delegate 
(Secretary) ``shall require reporting (at such time and in such manner 
as the Secretary shall prescribe) with respect to the opening and 
closing balance of reserves and with respect to the method of computing 
reserves for purposes of determining income.'' In accordance with 
section 807(e)(6), Sec.  1.807-3 of the proposed regulations (proposed 
Sec.  1.807-3) provides that the IRS may require reporting on Form 
1120-L with respect to the opening and closing balances of the items 
described in section 807(c) and with respect to the method of computing 
such items for the purposes of determining income.
    One commenter requested further consultation with the life 
insurance industry before any additional reserve reporting requirements 
are implemented. According to the commenter, this consultation will be 
necessary to ensure that the information provided is useful to the 
government and that providing the information is not unduly burdensome 
to taxpayers relative to the information's utility.
    The IRS understands the importance of obtaining the life insurance 
industry's input before changing the reporting requirements. Proposed 
Sec.  1.807-3 is adopted as final by this Treasury decision, and the 
IRS expects to consult with the life insurance industry before making 
any changes to reporting requirements. Further, as discussed in the 
Special Analysis section of this preamble, any future changes to tax 
return form requirements stemming from this provision would be subject 
to burden analysis and public notice and comment under the Paperwork 
Reduction Act, which requirements the IRS is committed to follow.

4. Comments and Changes Relating to Sec.  1.816-1 of the Proposed 
Regulations

    Section 1.816-1(a) of the proposed regulations (proposed Sec.  
1.816-1(a)) provides that a reserve (other than an asset adequacy 
reserve) that is computed using a tax reserve method as defined in 
section 807(d)(3) and that meets the requirements of section 816(b)(1) 
and (b)(2) will not be disqualified as a life insurance reserve solely 
because the method used to calculate the reserve takes into account 
factors other than those prescribed by section 816(b)(1) and (b)(2). 
Thus, for instance, reserves calculated using principle-based reserve 
methodologies will not fail to qualify as life insurance reserves 
solely because the reserves might be calculated using certain factors 
in addition to assumed rates of interest and recognized mortality or 
morbidity tables.
    One commenter requested the preamble for the final regulations 
state that in some cases the use of additional factors in computing 
reserves for taxable years prior to the effective date of these final 
regulations is not prohibited. The commenter did not want any negative 
inference that proposed Sec.  1.816-1 is making permissible what was 
before impermissible (namely using certain additional factors in 
computing reserves).
    The Treasury Department and the IRS agree that certain factors 
other than those prescribed by section 816(b)(1) and (b)(2) may be 
taken into account in determining life insurance reserves for taxable 
years prior to the effective date of these final regulations if the use 
of such factors would make the calculation of the reserve more 
accurate. See, e.g., Mutual Benefit Life Insurance Co. v. Commissioner, 
488 F.2d 1101, 1106 (3d Cir. 1974).

5. Comments and Changes Relating to Sec.  1.6012-2 of the Proposed 
Regulations

    The Conference Report to the TCJA contemplates requiring the 
electronic filing of annual statements to improve reporting of 
insurance reserves, as necessary to carry out and enforce section 807. 
H.R. Rep. No. 115-466, at 478-79 (2017) (Conference Report). In 
response to the Conference Report, the proposed regulations propose to 
remove Sec.  1.6012-2(c)(4), which prohibits an insurance company that 
files its Form 1120-L or Form 1120-PC electronically from attaching its 
annual statement (or pro forma annual statement) to its return.
    One commenter stated that for some of the largest groups of 
companies, the size limits found in section 2.1.2 of IRS Publication 
4164, Modernized e-File (MeF) Guide to Software Developers and 
Transmitters, Processing Year 2020, would likely be exceeded if the 
annual statement were to be filed electronically, and for other groups 
of companies, the size limit would likely be exceeded by the return and 
the annual statement when combined. The commenter suggested retaining 
the existing rule that electronic filers should not submit their annual 
statements with their returns, or alternatively, changing the 
requirement such that electronic filers must only submit limited parts 
of the annual statement.
    The final regulations retain Sec.  1.6012-2(c)(4), but it now 
provides that electronic filers must file their annual statement or a 
portion thereof in accordance with the applicable rules in the forms or 
instructions. The Treasury Department and the IRS anticipate that once 
the IRS has the capacity to accept the electronic filing of annual 
statements, the tax return forms and instructions will require 
electronic filing of all or portions of the annual statement. The IRS, 
however, expects to consult with the insurance industry before 
requiring such electronic filing.

6. Comments and Changes Relating to Sec.  1.817A-1 of the Proposed 
Regulations

    The proposed regulations propose to remove parts of Sec.  1.817A-1 
that pertain to sections 807(d)(2)(B) and 812(b)(2)(A). Those sections 
were removed by the TCJA. The notice of proposed rulemaking requested 
comments on whether Sec.  1.817A-1 should continue to provide a current 
market interest rate to be used in computing reserves under section 
807(c)(3) during the temporary guarantee period of a modified 
guaranteed contract (MGC) given that the TCJA modified the flush 
language of section 807(c) to provide a specific interest rate to be 
used in making section 807(c)(3) computations.
    One commenter recommended that Sec.  1.817A-1 be removed in its 
entirety. The final regulations remove provisions relating to section 
807(c)(3) but retain the provision (and related definitions) that 
waives section 811(d) for non-equity indexed MGCs during the temporary 
guarantee period, because these rules continue to remain relevant.

7. Conforming Changes to Regulations

    The proposed regulations also propose to remove or amend the 
following regulatory provisions: Sec. Sec.  1.338-11, 1.381(c)(22)-1, 
1.801-2, 1.801-5, 1.801-7, 1.801-8, 1.806-4, 1.809-2, 1.809-5, 1.810-3, 
1.817A-0, 1.818-2, 1.818-4, 1.848-1, and 301.9100-6T. These provisions 
were proposed to be removed or amended because they related to repealed 
or amended law or to regulations that were proposed to be removed or 
amended or they had no future application.
    One commenter suggested that parts of paragraph (a) of Sec.  1.801-
7, a provision proposed to be removed in its entirety, continue to 
remain relevant under section 817. By its terms, Sec.  1.801-7 is not 
applicable to any taxable year beginning after 1962. See Sec.  1.801-
7(d). Because Sec.  1.801-7 is not applicable to any taxable year after 
1962, the commenter's suggestion is not adopted.

[[Page 64390]]

    More generally, the commenter requested removal of more 
``deadwood'' provisions than provided for in the notice of proposed 
rulemaking. The removal of additional ``deadwood'' provisions is beyond 
the scope of this rulemaking. No other specific comments were received 
with respect to these proposed conforming changes.

8. Comments Regarding Foreign-Issued Life Insurance and Annuity 
Contracts

    The Code contains a statutory definition of a life insurance 
contract under section 7702, rules applicable to certain flexible 
premium contracts under section 101(f), distribution on death 
requirements under section 72(s), and diversification requirements 
under section 817(h). These statutory requirements, which reflect 
Congress's concern that the tax-favored treatment generally accorded 
life insurance and annuity contracts was available to contracts that 
were too investment oriented or provided for undue tax deferral, are 
relevant to the tax treatment of a policyholder, annuitant, or 
beneficiary as well as the entity that issues or reinsures a life 
insurance or annuity contract.
    In response to a request to promulgate regulations that exempt 
certain contracts from the statutory requirements of sections 72(s), 
101(f), 817(h), and 7702, the preamble to the proposed regulations asks 
for comments on whether such regulations should be promulgated. As 
described in the preamble to the proposed regulations, the requested 
exemption would apply to contracts issued by a non-U.S. insurance 
company and reinsured by a U.S. insurance company if (i) no 
policyholder, insured, annuitant, or beneficiary with respect to the 
contract is a U.S. person and (ii) such contract is regulated as a life 
insurance or annuity contract by a foreign regulator. The preamble to 
the proposed regulations states that the Treasury Department and the 
IRS are evaluating the request, including whether to address it as part 
of this rulemaking, and requests comments including in respect of 
statutory interpretation and implications in various contexts and 
provisions outside of subchapter L.
    Three comments were received. One commenter (whose comment was 
endorsed by another commenter) generally repeated the original request 
(but narrowed the requested exemptions to only sections 7702 and 72(s)) 
and stated that such regulations would assist U.S. reinsurers of 
exempted contracts to qualify as life insurance companies under section 
816. The commenter asserted that the proposal would (i) align with 
domestic and U.S. international tax policy considerations because they 
would be applicable only to contracts owned by and benefitting persons 
not subject to Federal income tax and (ii) support policy goals of the 
TCJA to bring profitable business operations into the United States. 
The commenter further asserted that such regulations would not (i) 
affect the character, source, or separate category basket in which 
income derived from the reinsurance is included for U.S. withholding 
tax or foreign tax credit purposes, (ii) alter the application of any 
applicable U.S. withholding tax on income from sources within the 
United States paid by a domestic insurance company to any foreign 
corporation, or (iii) affect the treatment under section 59A of any 
claims and benefits or any other amounts paid by a domestic insurance 
company to a foreign related party under a reinsurance contract. The 
commenter acknowledged that it may not be possible for a U.S. insurance 
company to know the identity of a contract's underlying beneficial 
owners unless the beneficial owner and the policyholder were the same 
person and requested that U.S. insurance companies be able to rely upon 
the Foreign Account Tax Compliance Act beneficial ownership rules to 
determine if a contract has a U.S. person as a beneficial owner.
    Another commenter stated that tax reserve deductions are already 
available for failed life insurance contracts under other provisions of 
section 807(c), just in a different amount than would be the case with 
life insurance reserve treatment. The commenter stated that there could 
nevertheless be benefits of conformity and suggested an alternative 
proposal. The commenter recommended that the Treasury Department and 
the IRS use their authority under sections 811(a) and 7805(a) to issue 
regulations that provide that reserves held by a U.S. reinsurer 
relating to indemnity reinsurance of contracts issued by a foreign 
insurance company be treated as life insurance reserves for purposes of 
subchapter L if: (i) The underlying contracts are issued by a foreign 
insurer, (ii) such contracts are regulated as life insurance or annuity 
contracts both under the applicable law in the foreign jurisdiction and 
by the regulator of the reinsuring domestic insurance company, (iii) 
the NAIC prescribes reserves for such contracts that are computed as 
reserves applicable to life insurance or annuity contracts, and (iv) 
the initial issuance of the insurance contract to the policyholder was 
not through the conduct of a trade or business within the United 
States.
    The considerations surrounding the issuance of the requested 
regulations are complex and require further study. Accordingly, the 
Treasury Department and the IRS have decided not to issue the requested 
regulations as part of this rulemaking and will continue to carefully 
consider these comments.

Applicability Dates

    The rules in the final regulations apply to taxable years beginning 
after October 13, 2020.
    A taxpayer may rely on Sec.  1.807-4 or 1.816-1 of the proposed 
regulations for a taxable year beginning after December 31, 2017, and 
on or before October 13, 2020. Alternatively, a taxpayer may choose to 
apply Sec.  1.807-4, 1.816-1, or 1.817A-1(b) of the final regulations 
to a taxable year beginning after December 31, 2017, the effective date 
of the revision of section 807 made by the TCJA, and on or before 
October 13, 2020, provided the taxpayer consistently applies the 
relevant regulation to that taxable year and all subsequent taxable 
years. See section 7805(b)(7).

Effect on Other Documents

    The following revenue rulings are obsoleted for taxable years 
beginning after October 13, 2020: Rev. Rul. 2002-6, 2002-1 C.B. 460, 
Rev. Rul. 94-74, 1994-2 C.B. 157, Rev. Rul. 80-117, 1980-1 C.B. 143, 
Rev. Rul. 80-116, 1980-1 C.B. 141, Rev. Rul. 78-354, 1978-2 C.B. 190, 
Rev. Rul. 77-198, 1977-1 C.B. 190, Rev. Rul. 75-308, 1975-2 C.B. 264, 
Rev. Rul. 74-57, 1974-1 C.B. 163, Rev. Rul. 70-568, 1970-2 C.B. 140, 
Rev. Rul. 70-192, 1970-1 C.B. 153, Rev. Rul. 69-444, 1969-2 C.B. 145, 
Rev. Rul. 65-240, 1965-2 C.B. 236, Rev. Rul. 65-233, 1965-2 C.B. 228, 
and Rev. Rul. 65-143, 1965-1 C.B. 261.
    Notice 2010-29 is obsoleted for taxable years beginning after 
December 31, 2017.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.

Paperwork Reduction Act

    The collection of information relating to the final regulations was 
submitted to the Office of Management and Budget for review under OMB 
Control Number 1545-0123 in accordance with the

[[Page 64391]]

Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).
    In response to the Conference Report and comments on the proposed 
regulations, Sec.  1.6012-2(c)(4), as revised by the final regulations, 
provides that an insurance company should include the insurance 
company's annual statement (as defined in Sec.  1.6012-2(c)(5)), or a 
portion thereof, with an electronically filed Federal income tax return 
(Form 1120-L for a life insurance company and Form 1120-PC for a 
nonlife insurance company) as required by the applicable forms or 
instructions. Federal income tax items of an insurance company are 
determined in part based upon the insurance company's annual statement. 
Providing the annual statement, or a portion thereof, to the IRS with 
an electronically filed Federal income tax return will allow the IRS to 
better and more efficiently examine an insurance company's Federal 
income tax return. However, until the applicable forms or instructions 
are revised, the current rules for including the annual statement with 
an electronically filed Federal income tax return continue to apply.
    For purposes of the Paperwork Reduction Act, the burden for the 
collection of information associated with Sec.  1.6012-2 of the final 
regulations will be reflected in the burden on the Form 1120-L and in 
the burden on the Form 1120-PC (OMB Control Number 1545-0123) when the 
burden for each is revised to reflect the collection of information 
associated with Sec.  1.6012-2 of the final regulations. The 
respondents to the collection of information are life insurance 
companies that file the Form 1120-L electronically and nonlife 
insurance companies that file the Form 1120-PC electronically. The 
Treasury Department and the IRS expect to consult with the life 
insurance industry before making any changes to these reporting 
requirements.
    In accordance with section 807(e)(6), as added by the TCJA, Sec.  
1.807-3 of the final regulations provides that the IRS may require 
reporting on Form 1120-L of the opening balance and closing balance of 
items described in section 807(c) (for example, life insurance 
reserves) and the method of computing such items for purposes of 
determining income. Providing this information will allow the IRS to 
better examine an insurance company's Federal income tax return. 
However, under Sec.  1.807-3 of the final regulations, this information 
is not required to be provided on any prescribed forms, such as the 
Form 1120-L, until the relevant prescribed forms or instructions are 
revised to require the reporting of such information.
    For purposes of the Paperwork Reduction Act, the burden for the 
collection of information associated with Sec.  1.807-3 of the final 
regulations will be reflected in the burden on the Form 1120-L (OMB 
Control Number 1545-0123) when the burden is revised to reflect the 
collection of information associated with Sec.  1.807-3 of the final 
regulations. The respondents to the collection of information are life 
insurance companies that file a Form 1120-L. The Treasury Department 
and the IRS expect to consult with the life insurance industry before 
making any changes to these reporting requirements.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Regulatory Flexibility Act

    It is hereby certified that the final regulations will not have a 
significant economic impact on a substantial number of small entities 
pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6).
    Section 13517 of the TCJA added section 807(e)(6) to the Code. 
Under section 807(e)(6), the Secretary may require reporting (at such 
time and in such manner as the Secretary shall prescribe) with respect 
to the opening balances and the closing balances of reserves and with 
respect to the method of computing reserves for purposes of determining 
income. Section 1.807-3 of the final regulations allows the IRS to 
require the reporting of this information on any prescribed forms, such 
as the Form 1120-L.
    The Conference Report provides that, under existing authority, the 
Secretary may require an insurance company to provide its annual 
statement via a link, electronic copy, or other similar means. See 
Conference Report at 478-79. Section 1.6012-2(c)(4) of the final 
regulations provides that an insurance company should include the 
insurance company's annual statement, or a portion thereof, with an 
electronically filed Federal income tax return (Form 1120-L for a life 
insurance company and Form 1120-PC for a nonlife insurance company) as 
required by the applicable forms or instructions. Under current 
procedures, an insurance company can only electronically file a Form 
1120-L or Form 1120-PC if the insurance company is part of an 
affiliated group filing a consolidated return, the parent of which 
files a Form 1120. Although data are not readily available, the 
Treasury Department and the IRS expect that any reporting burden 
associated with Sec.  1.6012-2(c) will fall primarily on financial and 
insurance firms with annual receipts greater than $41.5 million and, 
therefore, will not affect a substantial number of small entities. See 
13 CFR 121.201, sector 52 (finance and insurance).
    As stated in the preceding paragraph, the rule is not expected to 
affect a substantial number of small entities; however, even if a 
substantial number of small entities were affected, the economic impact 
of the regulation is not likely to be significant. Section 1.807-3 of 
the final regulations is limited in scope to time and manner of 
information reporting, and any economic impact associated with this 
regulation is expected to be minimal. Further, the information reported 
to the IRS is information that the insurance company has readily 
available and the Treasury Department and the IRS expect to consult 
with the life insurance industry before making any changes to the 
reporting requirements. Accordingly, the Secretary certifies that the 
final regulations will not have a significant economic impact on a 
substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding the Final Regulations was submitted to the Chief 
Counsel for the Office of Advocacy of the Small Business Administration 
for comment on its impact on small business, and no comments were 
received from the Chief Counsel for the Office of Advocacy of the Small 
Business Administration.

Drafting Information

    The principal author of these regulations is Ian Follansbee, Office 
of Associate Chief Counsel (Financial Institutions and Products), IRS. 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

Statement of Availability of IRS Documents

    The IRS notices, revenue procedures, and revenue rulings cited in 
this preamble are published in the Internal Revenue Bulletin (or 
Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at http://www.irs.gov.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

[[Page 64392]]

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding a 
sectional authority for Sec.  1.807-3 in numerical order to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.807-3 also issued under 26 U.S.C. 807(e)(6).
* * * * *

0
Par. 2. Section 1.338-11 is amended by:
0
1. Revising paragraph (d)(2).
0
2. In paragraph (d)(3)(i), removing the language ``and (d)(3)(iii)'' 
and adding ``through (iv)'' in its place.
0
3. Redesignating paragraph (d)(3)(iii) as paragraph (d)(3)(iv).
0
4. Adding a new paragraph (d)(3)(iii).
0
5. Revising newly redesignated paragraph (d)(3)(iv).
0
6. Adding paragraph (d)(7)(iii).
    The revisions and additions read as follows:


Sec.  1.338-11  Effect of section 338 election on insurance company 
targets.

* * * * *
    (d) * * *
    (2) Exception. New target is not treated as receiving additional 
premium under paragraph (d)(1) of this section if it is under state 
receivership as of the close of the taxable year for which the increase 
in reserves occurs.
    (3) * * *
    (iii) Increases in section 807(c) reserves. The positive amount 
with respect to the items referred to in section 807(c) other than 
discounted unpaid loss reserves is the sum of the net increases in such 
items that are required to be taken into account under section 807(f).
    (iv) Increases in other reserves. The positive amount with respect 
to reserves other than discounted unpaid loss reserves and other items 
referred to in section 807(c) is the net increase of those reserves due 
to changes in estimate, methodology, or other assumptions used to 
compute the reserves (including the adoption by new target of a 
methodology or assumptions different from those used by old target).
* * * * *
    (7) * * *
    (iii) Application of paragraphs (d)(2) and (3) of this section. 
Paragraphs (d)(2) and (3) of this section apply to taxable years 
beginning after October 13, 2020. For taxable years beginning on or 
before such date, see paragraph (d) of this section as contained in 26 
CFR part 1 revised as of April 1, 2020.
* * * * *


Sec.  1.381(c)(22)-1  [Amended]

0
Par. 3. In Sec.  1.381(c)(22)-1, paragraph (b)(6) is removed and 
reserved.


Sec.  1.801-2  [Amended]

0
Par. 4. Section 1.801-2 is amended in the second sentence by removing 
the language ``1.801-7'' and adding ``1.801-6'' in its place.


Sec.  1.801-5  [Amended]

0
Par. 5. In Sec.  1.801-5, paragraph (c) is removed and reserved.


Sec.  1.801-7  [Removed and reserved]

0
Par. 6. Section 1.801-7 is removed and reserved.


Sec.  1.801-8  [Amended]

0
Par. 7. In Sec.  1.801-8, paragraph (e) is removed and reserved.


Sec.  1.806-4  [Removed]

0
Par. 8. Section 1.806-4 is removed.

0
Par. 9. Section 1.807-1 is revised to read as follows:


Sec.  1.807-1   Computation of life insurance reserves.

    (a) Tax reserve method. For purposes of determining the amount of 
life insurance reserves for a contract under section 807(d)(1), section 
807(d)(2) requires the determination of the amount of the reserve for a 
contract using the tax reserve method applicable to the contract. Under 
section 807(d)(3), the tax reserve method applicable to the contract is 
the Commissioners' Reserve Valuation Method (CRVM), the Commissioners' 
Annuities Reserve Valuation Method (CARVM), or other reserve method 
prescribed by the National Association of Insurance Commissioners 
(NAIC) that applies to the contract as of the date the reserve is 
determined. If the NAIC has not prescribed a reserve method that covers 
the contract, a reserve method that is consistent with the CRVM, the 
CARVM, or other NAIC-prescribed method as of the date the reserve is 
determined (whichever is most appropriate) must be used.
    (b) No asset adequacy reserve. The life insurance reserve 
determined under section 807(d)(1) does not include any asset adequacy 
reserve.
    (1) An asset adequacy reserve is--
    (i) Any reserve that is established as an additional reserve based 
upon an analysis of the adequacy of reserves that would otherwise be 
established in accordance with the requirements set forth in the NAIC 
Valuation Manual, such as the CRVM or CARVM as applicable, or
    (ii) Any similar reserve.
    (2) In determining whether a reserve is a life insurance reserve, 
the label placed on such reserve is not determinative, provided, 
however, any reserve or portion of a reserve that would have been 
established pursuant to an asset adequacy analysis required by the 
NAIC's Valuation Manual 30 as it existed on December 22, 2017, the date 
of enactment of Public Law 115-97, is an asset adequacy reserve.
    (c) Applicability date. The rules of this section apply to taxable 
years beginning after October 13, 2020.

0
Par. 10. Sections 1.807-3 and 1.807-4 are added before the undesignated 
center heading ``Gain and Loss From Operations'' to read as follows:


Sec.  1.807-3  Reporting of reserves.

    (a) Reserve reporting. A life insurance company subject to tax 
under section 801 is required to make a return on Form 1120-L, U.S. 
Life Insurance Company Income Tax Return. The Internal Revenue Service 
may require reporting with respect to the opening balance and closing 
balance of items described in section 807(c) and with respect to the 
method of computing such items for purposes of determining income. Such 
reporting may provide for the manner in which separate account items 
are reported. (See section 6011 and Sec.  301.6011-1 of this chapter.)
    (b) Applicability date. The rules of this section apply to taxable 
years beginning after October 13, 2020.


Sec.  1.807-4  Adjustment for change in computing reserves.

    (a) Requirement to follow administrative procedures. Under section 
807(f), a change in basis of computing an item referred to in section 
807(c) is a change in method of accounting. Accordingly, except as 
provided in Sec.  1.446-1(e), a change in basis of computing an item 
referred to in section 807(c) is a change in method of accounting for 
purposes of Sec.  1.446-1(e). Before computing such item under a new 
basis, a life insurance company must obtain the consent of the 
Commissioner of Internal Revenue or his delegate (Commissioner) 
pursuant to administrative procedures prescribed by the Commissioner. 
Similarly, an insurance company other than a life

[[Page 64393]]

insurance company (a nonlife insurance company) that changes its basis 
of computing life insurance reserves must obtain the consent of the 
Commissioner pursuant to administrative procedures prescribed by the 
Commissioner.
    (b) Section 481 adjustment--(1) In general. If the basis of 
computing any item referred to in section 807(c) as of the close of any 
taxable year (the year of change) differs from the basis of computing 
such item at the close of the preceding taxable year, then the 
difference between the amount of the item at the close of the taxable 
year computed on the new basis and the amount of the item at the close 
of the taxable year computed on the old basis that is attributable to 
contracts issued before the taxable year, is taken into account under 
section 481 and Sec. Sec.  1.481-1 through 1.481-5 as an adjustment 
attributable to a change in method of accounting.
    (2) Loss of company status. If for any taxable year a taxpayer that 
was an insurance company for the year of change is no longer an 
insurance company, then the taxpayer must take into account in the 
preceding taxable year (that is, the last taxable year it was an 
insurance company) the balance of any section 481(a) adjustment 
determined under paragraph (b)(1) of this section. A taxpayer that was 
an insurance company for the year of change does not accelerate the 
balance of any section 481(a) adjustment determined under paragraph 
(b)(1) of this section merely because it changes from a life insurance 
company to a nonlife insurance company or because it changes from a 
nonlife insurance company to a life insurance company.
    (c) Effect on determining increase or decrease in reserves--(1) 
Effect under section 807(a) and (b). If there is a change in basis of 
computing any item referred to in section 807(c) for a taxable year, 
then, for purposes of section 807(a) and (b), the closing balance for 
such item for the year of change with respect to contracts issued 
before the year of change is determined on the old basis and the 
opening balance for such item for the next taxable year for such 
contracts is computed on the new basis.
    (2) Effect under section 832. The following rules apply for 
purposes of section 832(b)(4):
    (i) For the year of change, life insurance reserves at the end of 
the year of change with respect to contracts issued before the year of 
change are determined on the old basis.
    (ii) For the taxable year following the year of change, life 
insurance reserves at the end of the preceding taxable year (that is, 
the year of change) with respect to contracts issued before the year of 
change are determined on the new basis.
    (d) Examples. The principles of paragraphs (a) through (c) of this 
section are illustrated by the following examples. For purposes of 
these examples and except as otherwise provided, IC is a life insurance 
company within the meaning of section 816(a) that issues life insurance 
and annuity contracts. IC is required to determine the amount of life 
insurance reserves under section 807(d) and to take net increases or 
decreases in the reserves into account in computing life insurance 
company taxable income. IC's reserve for each insurance contract at 
issue exceeds the net surrender value for such contract and does not 
exceed the statutory reserve for such contract. IC is on an accrual 
method and uses a calendar year as its taxable year.
    (1) Example 1--(i) Facts. In 2021, IC changed the basis of 
computing the amount of life insurance reserves for a certain type of 
life insurance contract as described in section 807(f). Both the basis 
used for computing the reserves for the relevant contracts at the close 
of the 2020 taxable year (old basis) and the basis of computing the 
reserves for the relevant type of contract at the close of the 2021 
taxable year (new basis) are consistent with the applicable 
Commissioners' Reserve Valuation Method. IC followed the administrative 
procedures prescribed by the Commissioner to obtain consent to change 
the basis of computing these reserves. IC determined that the life 
insurance reserves as of December 31, 2021, for the relevant contracts 
issued prior to 2021 were $110x if computed using the old method and 
$120x if computed using the new method. IC also determined that the 
life insurance reserves as of December 31, 2021, for the relevant 
contracts issued during 2021 were $15x using the new basis.
    (ii) Analysis. IC must take into account under section 481 and the 
administrative procedures prescribed by the Commissioner the $10x 
difference between the reserves for the relevant contracts issued prior 
to 2021 computed under the old basis ($110x) and the reserves for such 
contracts computed under the new basis ($120x). For purposes of 
determining any net increase or net decrease in reserves in taxable 
year 2021 under section 807(a) or (b), IC's closing balance of life 
insurance reserves computed under section 807(d) with respect to the 
relevant contracts is $110x for contracts issued prior to 2021 
(computed on the old basis) and $15x for contracts issued during 2021 
(computed on the new basis). IC's opening balance in 2022 for life 
insurance reserves for the relevant contracts is $135x (computed on the 
new basis).
    (2) Example 2--(i) Facts. The facts are the same as in paragraph 
(d)(1) of this section (the facts in Example 1), except that IC is an 
insurance company that is not a life insurance company. IC is required 
to compute taxable income under section 832.
    (ii) Analysis. IC must take into account under section 481 and the 
administrative procedures prescribed by the Commissioner the $10x 
difference between the reserves for the relevant contracts issued prior 
to 2021 computed under the old basis ($110x) and the reserves for such 
contracts computed under the new basis ($120x). For purposes of 
determining the premiums earned on insurance contracts during the 
taxable year as described in section 832(b)(4) for the year of change, 
the life insurance reserves at the end of the taxable year are $110x 
for contracts issued prior to 2021 (computed on the old basis) and $15x 
for contracts issued during 2021 (computed on the new basis). For 
purposes of determining the premiums earned on insurance contracts 
during the taxable year as described in section 832(b)(4) for the 
taxable year following the year of change, the life insurance reserves 
at the end of the preceding taxable year (the year of change) with 
respect to relevant contracts are $135x (computed on the new basis).
    (e) Applicability date. The rules of this section apply to taxable 
years beginning after October 13, 2020. However, a taxpayer may choose 
to apply the rules of this section for a taxable year beginning after 
December 31, 2017, the effective date of the revision of section 807 by 
Public Law 115-97, and on or before October 13, 2020, provided the 
taxpayer consistently applies the rules of this section to that taxable 
year and all subsequent taxable years. See section 7805(b)(7).


Sec.  1.809-2  [Removed and reserved]

0
Par. 11. Section 1.809-2 is removed and reserved.


Sec.  1.809-5  [Amended]

0
Par. 12. Section 1.809-5 is amended by removing the language ``and 
Sec.  1.810-3'' from the last sentence of paragraph (a)(5)(iii).


Sec.  1.810-3  [Removed]

0
Par. 13. Section 1.810-3 is removed.

0
Par. 14. Section 1.816-1 is added before the undesignated center 
heading ``Miscellaneous Provisions'' to read as follows:

[[Page 64394]]

Sec.  1.816-1  Life insurance reserves.

    (a) Definition of life insurance reserves. Except as provided in 
section 816(h), a reserve that meets the requirements of section 
816(b)(1) and (2) will not be disqualified as a life insurance reserve 
solely because the method used to compute the reserve takes into 
account other factors, provided that the method used to compute the 
reserve is a tax reserve method as defined in section 807(d)(3) and 
that such reserve is not an asset adequacy reserve as described in 
Sec.  1.807-1(b).
    (b) Applicability date. The section applies to taxable years 
beginning after October 13, 2020.
    However, a taxpayer may choose to apply the rules of this section 
for a taxable year beginning after December 31, 2017, the effective 
date of the revision of section 807 by Public Law 115-97, and on or 
before October 13, 2020, provided the taxpayer consistently applies the 
rules of this section to that taxable year and all subsequent taxable 
years. See section 7805(b)(7).


Sec.  1.817A-0  [Removed]

0
Par. 15. Section 1.817A-0 is removed.

0
Par. 16. Section 1.817A-1 is amended by:
0
1. Removing paragraphs (a)(5) and (6).
0
2. Revising paragraph (b).
0
3. Removing paragraph (c).
0
4. Redesignating paragraph (d) as paragraph (c).
0
5. Revising newly designated paragraph (c).
    The revisions read as follows:


Sec.  1.817A-1  Certain modified guaranteed contracts.

* * * * *
    (b) Waiver of section 811(d) for certain non-equity-indexed 
modified guaranteed contracts. Section 811(d) is waived during the 
temporary guarantee period when applied to non-equity-indexed MGCs.
    (c) Applicability dates. Paragraph (b) of this section applies to 
taxable years beginning after October 13, 2020. However, a taxpayer may 
choose to apply the rules of paragraph (b) of this section for a 
taxable year beginning after December 31, 2017, the effective date of 
the revision of section 807 by Public Law 115-97, and on or before 
October 13, 2020, provided the taxpayer consistently applies the rules 
of paragraph (b) of this section to that taxable year and all 
subsequent taxable years. See section 7805(b)(7). For taxable years 
beginning on or before October 13, 2020, see paragraph (b) of this 
section as contained in 26 CFR part 1 revised as of April 1, 2020.


Sec.  1.818-2  [Amended]

0
Par. 17. Section 1.818-2 is amended by removing paragraph (c).


Sec.  1.818-4  [Removed and reserved]

0
Par. 18. Section 1.818-4 is removed and reserved.


Sec.  1.848-1   [Amended]

0
Par. 19. Section 1.848-1 is amended in paragraph (b)(2)(i) by removing 
the language ``section 807(e)(4)'' and adding the language ``section 
807(e)(3)'' in its place.

0
Par. 20. Section 1.6012-2 is amended by:
0
1. Revising paragraph (c)(4).
0
2. Revising paragraph (l).
    The revisions read as follows:


Sec.  1.6012-2  Corporations required to make returns of income.

* * * * *
    (c) * * *
    (4) Special rule for insurance companies filing their Federal 
income tax returns electronically. If an insurance company described in 
paragraph (c)(1), (2), or (3) of this section files its Federal income 
tax return electronically, it must include on or with such return its 
annual statement (or pro forma annual statement), or a portion thereof, 
as and to the extent required by forms or instructions. If the full 
annual statement is not required to be included with the return, such 
statement must be available at all times for inspection by authorized 
Internal Revenue Service officers or employees and retained for so long 
as such statements may be material in the administration of any 
internal revenue law. See Sec.  1.6001-1(e).
* * * * *
    (l) Applicability date. Paragraph (c) of this section applies to 
any taxable year beginning after October 13, 2020. For taxable years 
beginning on or before October 13, 2020, see paragraph (c) of this 
section as contained in 26 CFR part 1 in effect on April 1, 2020.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 21. The authority citation for part 301 continues to read in part 
as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *

0
Par. 22. Section 301.9100-6T is amended by:
0
1. Adding a title to the table in paragraph (a)(1).
0
2. Removing from the table in paragraph (a)(1) the three entries for 
``211'' and the entries for ``216(c)(1),'' ``216(c)(2),'' ``217(i),'' 
and ``217(l)(2)(B).''
0
3. Removing and reserving paragraph (a)(2)(iii).
0
4. Removing paragraph (a)(3)(v).
0
5. In paragraph (a)(4):
0
i. Removing ``211 (Code section 810(b)(3)), 216(c) (1) and (2), 
217(l),'' from the first sentence.
0
ii. Removing ``211 (Code sections 806(d)(4), and 807(d)(4)(C)), 
217(i),'' from the second sentence.
0
iii. Removing the last sentence.
    The addition reads as follows:


Sec.  301.9100-6T  Time and manner of making certain elections under 
the Deficit Reduction Act of 1984.

    (a) * * *
    (1) * * *

Table 1 to Paragraph (a)(1)

* * * * *

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: September 1, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-20144 Filed 10-9-20; 8:45 am]
BILLING CODE 4830-01-P